Here's How to Teach Kids About Investing

Kids are interested in investing when the lessons are appropriately framed. Tom Merton / Getty Images

More than 20 years in investment management has taught me that there’s no substitute for investment education and experience. So much of our future financial security depends on our understanding of how important it is to save and our ability to determine the best possible investments to meet overall investing goals. That’s why it’s so important to me to teach my children about investing. And why it’s something you may want to consider as well.

Investment and savings education can be an impactful part of the legacy that you pass on, helping your children or grandchildren get off to a start that could provide significant benefits for them for the rest of their lives.

As a parent of two young children, I’ve found that it’s best to keep lessons simple. Kids are interested in investing when the lessons are appropriately framed. Here are some strategies that you can use to teach your children or grandchildren about saving and investing:

START WITH SAVING

Whether kids have an allowance, earn money for doing chores or receive gifts, reinforcing the lesson that saving is important is a good first step. For Christmas several years ago, both kids received piggy banks from Santa. My wife and I explained how important it is to save. More recently, we gave my 7-year-old son a kids’ safe, where he keeps his and his younger sister’s dollar bill savings — the change is in the piggy banks. We teach them about the value of money in terms of spending, saving, giving and future value. They’ve both saved for toys they’ve wanted — my daughter for multiple stuffed animals (her attempt at diversification) and my son for a scooter. When they ask for something they want to buy, we use that as an opportunity to discuss differences in price and how it requires more effort to save for a toy that costs $25 over a $5 toy. They also donate some of what they save to a worthy cause that they relate to as part of a lesson in giving. As the kids get older, we’ll help them open savings accounts, extending that lesson further, and introducing them to what a bank is and does as well.

RELATE TO THEIR INTERESTS

As you go on trips or even run errands around town, use those experiences to introduce and further discuss savings and investing concepts. For example, we’ve used trips to Disney and outings to the local grocery store to communicate some basic information about corporations and stock ownership. It’s a continual learning story — we’ve explained that when customers pay money for groceries or tickets, the money that is left over after expenses are paid is profit that comes back to stockholders. After a trip to the store and discussions on how crowded it is, we go home and check the stock charts to see how accurate our judgment is. This is where teaching and connecting concepts to kids actually works in practice.

TEACH THE BASICS

Lessons on compound interest and inflation can help kids understand why it’s important to invest early. Explaining compound interest in the context of a specific example shows them how money grows over time. It’s not as easy a concept to illustrate as it used to be with interest rates so low, but as rates rise, that will change. This could work by employing a “Bank of Dad” concept. A friend and colleague of mine created a family Bank of Dad for his children, which paid interest on savings at a rate of 10 percent a month as an incentive to save. By paying meaningful interest, the kids could better understand the benefits of savings versus immediate spending. All of their allowance and cash gifts went into the Bank of Dad, and he credited them with interest every month using an app. This is a concept I can see myself adopting as my own kids mature — albeit with a slightly less generous interest rate!

As you go on trips or even run errands around town, use those experiences to introduce and further discuss savings and investing concepts.Twenty20

EDUCATE ABOUT RISK AND REWARD

An appreciation of risk and reward is a concept that is actually fairly easy to introduce to kids. My wife and I use the forum of NFL games, which both kids like and understand. Our family has a pick-the-winner NFL football pool each week. We discuss the games and make our picks on Sunday morning. I’ve found it to be a great teaching moment in terms of helping the kids learn how to assess something and then decide which option (team) presents the most favorable risk-reward profile. An important part of understanding risk and reward and deciding between investments with different risk and reward characteristics is the ability to use research and past experience to make a decision on a potential future outcome. We’re helping the kids understand that lesson, and there are many potential future takeaways from those concepts, including on the investing front.

We teach them about the value of money in terms of spending, saving, giving and future value.

BUY A STOCK

As kids gain maturity, buying stock in a company they are interested in is a logical next step. There are multiple ways to make this happen. You could start slowly and first ask your child to pick some companies he or she is interested in and learn more about what they do and follow a stock chart over time. That could evolve into setting up a low-cost brokerage account and challenging your child to save money or contributing funds to buy a stock or stocks or a combination of the two approaches. Make sure you work with your child on an ongoing basis to monitor investments and discuss the implications of success or failure. Knowing my children and the competitive spirit with which they approach our weekly NFL pool, there may very well be a “Beat Dad in Investing” competition in our future.

TOOLS FOR LONG-TERM SUCCESS

By teaching your kids about saving and investing, you’re equipping them with knowledge that will benefit them throughout their lifetime. Instill the kind of investing habits you’d like to see them emulate in the future. This will help ensure that your investing legacy lives on.

All investments carry some level of risk including the potential loss of principal invested.

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